Tuesday, March 19, 2013

CAN AN ARBITRATION CLAUSE HAVE AN ENFORCEABLE PROVISION TO THE EFFECT THAT IT IS SUBJECT TO JUDICIAL REVIEW FOR AN ERROR OF LAW?

CAN AN ARBITRATION CLAUSE HAVE AN ENFORCEABLE PROVISION TO THE EFFECT THAT IT IS SUBJECT TO JUDICIAL REVIEW FOR AN ERROR OF LAW?

The Federal Arbitration Act, 9 U.S.C. 10, provides the grounds on which an arbitration clause can be vacated.    These include, primarily, grounds like fraud, corruption, undue means, evident partiality, other gross misbehavior, or exceeding their powers.    These grounds have been held to be exclusive.   Hall Street Assoc., LLC v. Mattel, Inc., 552 U.S. 576, 578 (2008).   Thus, under the FAA, a clause providing that there would be judicial review for an error of law would be unenforceable.

However, such a clause is permissible under the Texas General Arbitration Act ("TAA").    In Nafta Traders, Inc. v. Quinn, 339 S.W.3d 884 (Tex. 2011), the Texas supreme court found that it was permissible to have a clause which forbids the arbitrators from rendering a decision which contains reversible error under either state or federal law or to apply a cause of action or remedy not allowed under state or federal law.    Though enforcement of such a clause would have the effect of expanding the grounds available under the TAA for attacking an arbitral award, the court found the clause to be enforceable.   The court also found that the TAA had not been preempted by the FAA on this subject.

I have tried a major arbitration that had a clause like the one in Nafta.   Although the ground of review sounds narrow, the fact is that in any case of a degree of complexity, a clause like this will almost guarantee courthouse litigation in addition to arbitration.    Consequently, a good argument can be made that this sort of clause defeats some of the purposes of arbitration, such as a potentially speedier adjudication and one that will likely avoid the courthouse.

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